259 Phil.

606

THIRD DIVISION
[ G.R. No. 75875, December 15, 1989 ]
WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM
AND CHARLES CHAMSAY, PETITIONERS, VS. SANITARY WARES
MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F.
LEE, RAUL A. BONCAN, BALDWIN YOUNG AND AVELINO V. CRUZ,
RESPONDENTS.
[G.R. NO. 75951. DECEMBER 15, 1989]
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG AND AVELINO V. CRUZ, PETITIONERS,
VS. THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN
GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY AND
LUCIANO SALAZAR, RESPONDENTS.
[G.R. NOS. 75975-76. DECEMBER 15, 1989]
LUCIANO E. SALAZAR, PETITIONER, VS. SANITARY WARES
MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F.
LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ AND
THE COURT OF APPEALS, RESPONDENTS.
DE CIS ION

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals
in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986,
of the then Intermediate Appellate Court and directed that in all subsequent elections for
directors of Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc.
(ASI) cannot nominate more than three (3) directors; that the Filipino stockholders shall not
interfere in ASI's choice of its three (3) nominees; that, on the other hand, the Filipino
stockholders can nominate only six (6) candidates and in the event they cannot agree on the
six (6) nominees, they shall vote only among themselves to determine who the six (6)
nominees will be, with cumulative voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young
went abroad to look for foreign partners, European or American who could help in its
expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware,
United States entered into an Agreement with Saniwares and some Filipino investors whereby
ASI and the Filipino investors agreed to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing in the Philippines and selling here and
abroad vitreous china and sanitary wares. The parties agreed that the business operations in
the Philippines shall be carried on by an incorporated enterprise and that the name of the
corporation shall initially be "Sanitary Wares Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the
nomination and election of the directors of the corporation:

"3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the

form annexed hereto as Exhibit A and, insofar as permitted under Philippine law,
shall specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

"5. Management

(a) The management of the Corporation shall be vested in a Board of Directors,

which shall consist of nine individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation, three of the nine directors
shall be designated by American-Standard, and the other six shall be designated by
the other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority
group, including the grant of veto powers over a number of corporate acts and the right to
designate certain officers, such as a member of the Executive Committee whose vote was
required for important corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition that at
least 60% of the capital stock of the corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the
initially harmonious relations between the two groups. According to the Filipino group, a basic
disagreement was due to their desire to expand the export operations of the company to which
ASI objected as it apparently had other subsidiaries or joint venture groups in the countries
where Philippine exports were contemplated. On March 8, 1983, the annual stockholders'
meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by
the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the
stockholders then proceeded to the election of the members of the board of directors. The
ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and David P.
Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul
A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R.
Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles
Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent practice of the parties during the past
annual stockholders' meetings to nominate only nine persons as nominees for the nine-
member board of directors, and the legal advice of Saniwares' legal counsel. The following
events then, transpired:

x x x. There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the body of
stockholders present that a vote be taken on the ruling of the Chairman. The
Chairman, Baldwin Young, declared the appeal out of order and no vote on the
ruling was taken. The Chairman then instructed the Corporate Secretary to cast all
the votes present and represented by proxy equally for the 6 nominees of the
Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2
additional persons nominated, namely, Luciano E. Salazar and Charles Chamsay.
The ASI reprentative, Mr. Jaqua, protested the decision of the Chairman and
announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo,
AC-G.R. SP No. 05617) were being cumulatively voted for the three ASI
nominees and Charles Chamsay, and instructed the Secretary to so vote. Luciano
E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No.05617) were
being voted cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin
Young, nevertheless instructed the Secretary to cast all votes equally in favor of the
three ASI nominees, namely, Wolfgang Aurbach, John Griffin and David
Whittingham, and the six originally nominated by Rogelio Vinluan, namely, Ernesto
Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George
F. Lee, and Baldwin Young. The Secretary then certified for the election of the
following -- Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul
A. Boncan, Baldwin Young. The representative of ASI then moved to recess the
meeting which was duly seconded. There was also a motion to adjourn (p. 28,
Rollo, Ac-G.R. SP No. 05617). This motion to adjourn was accepted by the
Chairman, Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment were registered
and having been ignored, Mr. Jaqua, the ASI representative, stated that the meeting
was not adjourned but only recessed and that the meeting would be reconvened in
the next room. The Chairman then threatened to have the stockholders who did
not agree to the decision of the Chairman on the casting of votes bodily thrown
out. The ASI Group, Luciano E. Salazar and other stockholders, allegedly
representing 53 or 54% of the shares of Saniwares, decided to continue the
meeting at the elevator lobby of the American Standard Building. The continued
meeting was presided by Luciano E. Salazar, while Andres Gatmaitan acted as
Secretary. On the basis of the cumulative votes cast earlier in the meeting, the ASI
Group nominated its four nominees: Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the
said five directors were certified as elected directors by the Acting Secretary,
 Andres Gatmaitan, with the explanation that there was a tie among the other six (6)
nominees for the four (4) remaining positions of directors and that the body
decided not to break the tie." (pp. 37-39, Rollo of 75975-76)

These incidents triggered off the filing of separate petitions by the parties with the Securities
and Exchange Commission (SEC). The first petition filed was for preliminary injunction by
Saniwares, Ernesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo,
Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay.
The case was denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and
Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed
as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo Group and dismissing the quo warranto
petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the
SEC en banc which affirmed the hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate
Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay
(docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP
No.05617). The petitions were consolidated and the appellate court in its decision ordered the
remand of the case to the Securities and Exchange Commission with the directive that a new
stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the
supervision of the Commission.

Upon a motion for reconsideration filed by the appellees (Lagdameo Group) the appellate
court (Court of Appeals) rendered the questioned amended decision.

Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in
G.R. No. 75875 assign the following errors:

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED

ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD
OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO
ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM

EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE
NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS
AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS

PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo -
75875)
Petitioner Luciano E. Salazar in G.R. Nos.75975-76 assails the amended decision on the
following grounds:

"11.1 That Amended Decision would sanction the CA's disregard of binding
contractual agreements entered into by stockholders and the replacement of the
conditions of such agreements with terms never contemplated by the stockholders
but merely dictated by the CA.

"11.2 The Amended decision would likewise sanction the unlawful deprivation of
the property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation." (pp. 14-15, Rollo -75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

"THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE

RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE
DIVIDED INTO TWO BLOCS, FAILS TO FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT AND THE LAW.

II

"THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT

PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED
DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS
MEETING OF SANIWARES." (P. 24, Rollo - 75951)

The issues raised in the petitions are interrelated, hence, they are discussed Jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983
during its annual stockholders' meeting held on March 8, 1983. To answer this question the
following factors should be determined: (1) the nature of the business established by the
parties - whether it was a joint venture or a corporation and (2) whether or not the ASI Group
may vote their additional 10% equity during elections of Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of
contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678;
Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention
of the parties should be viewed strictly on the "Agreement" dated August 15, 1962 wherein it
is clearly stated that the parties' intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

 "(c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder." (At p.
66, Rollo - G.R. No. 75875)

They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo and Young Group on
the ground that it contravenes the parol evidence rule under section 7, Rule 130 of the
Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded
in their pleading that the "Agreement" failed to express the true intent of the parties.

The parol evidence rule under Rule 130 provides:

"Evidence of written agreements - When the terms of an agreement have been

rendered to writing, it is to be considered as containing all such terms, end
therefore, there can be, between the parties and their successors in interest, no
evidence of the terms of the agreement other than the contents of the writing,
except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue
by the pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to the ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply
and Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the
true intent of the parties, to wit:

xxx xxx xxx

"4. While certain provisions of the Agreement would make it appear that the
parties thereto disclaim being partners or joint venturers such disclaimer is directed
at third parties and is not inconsistent with, and does not preclude, the existence of
two distinct groups of stockholders in Saniwares one of which (the Philippine
Investors) shall constitute the majority, and the other (ASI) shall constitute the
minority stockholder. In any event, the evident intention of the Philippine
Investors and ASI in entering into the Agreement is to enter into a joint venture
enterprise, and if some words in the Agreement appear to be contrary to the
evident intention of the parties, the latter shall prevail over the former (Art. 1370,
New Civil Code). The various stipulations of a contract shall be interpreted
together attributing to the doubtful ones that sense which may result from all of
them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered. (Art. 1371, New Civil Code). (Part I, Original
Records, SEC Case No. 2417)

It has been ruled:

"In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint profit, the question
 whether they intended by their agreement to create a joint adventure, or to assume
some other relation is a question of fact for the jury. (Binder v. Kessler v 200 App.
Div. 40, 192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 S W 725; Hoge
v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows that the parties
agreed to establish a joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making body are all
consistent with a joint venture and not with an ordinary corporation. As stated by the SEC:

"According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

Agreement with ASI in behalf of the Philippine nationals. He testified that ASI
agreed to accept the role of minority vis-a-vis the Philippine National group of
investors, on the condition that the Agreement should contain provisions to protect
ASI as the minority.

"An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the
Agreement]. ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain transactions [Sec. 3
(b) (i)].

"The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given
the right to designate the president and plant manager [Sec. 5 (6)] The Agreement
further provides that the sales policy of Saniwares shall be that which is normally
followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard"
products otherwise than through ASI's Export Marketing Services (Sec. 13 (6)].
Under the Agreement, ASI agreed to provide technology and know-how to
Saniwares and the latter paid royalties for the same. (At p. 2)

xxx xxx xxx

"It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9
votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power. Furthermore,
the grant to ASI of the right to designate certain officers of the corporation; the
super-majority voting requirements for amendments of the articles and by-laws;
and most significantly to the issues of this case, the provision that ASI shall
designate 3 out of the 9 directors and the other stockholders shall designate the
other 6, clearly indicate that - 1) there are two distinct groups in Saniwares, namely
ASI, which owns 40% of the capital stock and the Philippine National stockholders
who own the balance of 60%, and that 2) ASI is given certain protections as the
minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
 relationship between the parties, i. e., ASI and the other stockholders."(pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to three ratio. Each group is assured of a fixed
number of directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin
Young also testified that Section 16(c) of the Agreement that "Nothing herein contained shall
be construed to constitute any of the parties hereto partners or joint venturers in respect of
any transaction hereunder" was merely to obviate the possibility of the enterprise being treated
as partnership for tax purposes and liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world. Arrangements are formalized where
a foreign group becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there is always a
danger from such arrangements. The foreign group may, from the start, intend to establish its
own sole or monopolistic operations and merely uses the joint venture arrangement to gain a
foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As
the Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or predominantly
take over the entire company. This undermining of joint ventures is not consistent with fair
dealing to say the least. To the extent that such subversive actions can be lawfully prevented,
the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeals:

"In fact, the Philippine Corporation Code itself recognizes the right of stockholders
to enter into agreements regarding the exercise of their voting rights.

" 'Sec. 100. Agreements by stockholders. –

xxx

“’2. An agreement between two or more stockholders, if in writing and signed by

the parties thereto, may provide that in exercising any voting rights, the shares held
by them shall be voted as therein provided, or as they may agree, or as determined
in accordance with a procedure agreed upon by them.'

"Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time
of the disputed stockholders meeting, these 95 stockholders are not separate from
each other but are divisible into groups representing a single identifiable interest.
For example, ASI, its nominees and lawyers count for 13 of the 95 stockholders.
The Young/Yutivo family count for another 13 stockholders, the Cham family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7
stockholders, etc. If the members of one family and/or business or interest group
are considered as one (which, it is respectfully submitted, they should be for
purposes of determining how closely held Saniwares is), there were as of 8 March
1983, practically only 17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and
Annex "A" thereof).

"Secondly, even assuming that Saniwares is technically not a close corporation

because it has more than 20 stockholders, the undeniable fact is that it is a close-
held corporation. Surely, appellants cannot honestly claim that Saniwares is a
public- issue or a widely held corporation.

"In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint
venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d
335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495, 82 S.E. 2d 771;
Deboy v. Harris, 207 Md., 212, 113 A 2d 903; Hathway v. Porter Royalty Pool,
Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262;
"The Legal Status of Joint Venture Corporations", 11 Vand. Law Rev., p. 680,
1958). These American cases dealt with legal questions as to the extent to which
the requirements arising from the corporate form of joint venture corporations
should control, and the courts ruled that substantial justice lay with those litigants
who relied on the joint venture agreement rather than the litigants who relied on the
orthodox principles of corporation law.

"As correctly held by the SEC Hearing Officer:

" 'It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted authority
has pointed out that just as in close corporations, shareholders' agreements in joint
venture corporations often contain provisions which do one or more of the
following: (1) require greater than majority vote for shareholder and director
action; (2) give certain shareholders or groups of shareholders power to select a
specified number of directors; (3) give to the shareholders control over the
selection and retention of employees; and (4) set up a procedure for the settlement
of disputes by arbitration (See I O'Neal, Close Corporations, 1971 ed., Section
1.06a, pp. 15-16) (Decision of SEC Hearing Officer, p. 16)'

"Thirdly, paragraph 2 of Sec. 100 of the Corporation Code does not necessarily
imply that agreements regarding the exercise of voting rights are allowed only in
close corporations. As Campos and Lopez-Campos explain:

"'Paragraph 2 refers to pooling and voting agreements in particular. Does this

provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty five
 stockholders, and therefore cannot qualify as a close corporation under section 96,
can some of them enter into an agreement to vote as a unit in the election of
directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into voting or pooling
agreements to protect their interests, as long as they do not intend to commit any
wrong or fraud on the other stockholders not parties to the agreement. Of course,
voting or pooling agreements are perhaps more useful and more often resorted to in
close corporations. But they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of close
corporations to those which comply with the requisites laid down by section 96, it
is entirely possible that a corporation which is in fact a close corporation will not
come within the definition. In such case, its stockholders should not be precluded
from entering into contracts like voting agreements if these are otherwise valid.
(Campos & Lopez-Campos, op cit, p. 405)'

"In short, even assuming that sec. 5(a) of the Agreement relating to the designation
or nomination of directors restricts the right of the Agreement's signatories to vote
for directors, such contractual provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include appellants." (Rollo - G. R. No.
75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity
during elections of Saniwares' board of directors, the Court of Appeals correctly stated:

"As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a)
hereof says that three of the nine directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the Filipino stockholders. This
allocation of board seats is obviously in consonance with the minority position of
ASI.

"Having entered into a well-defined contractual relationship, it is imperative that the

parties should honor and adhere to their respective rights and obligations
thereunder. Appellants seem to contend that any allocation of board seats, even in
joint venture corporations, are null and void to the extent that such may interfere
with the stockholder's rights to cumulative voting as provided in Section 24 of the
Corporation Code. This Court should not be prepared to hold that any agreement
which curtails in any way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced businessmen and do not
prejudice those who are not parties thereto. It may well be that it would be more
cogent to hold, as the Securities and Exchange Commission has held in the decision
appealed from, that cumulative voting rights may be voluntarily waived by
stockholders who enter into special relationships with each other to pursue and
implement specific purposes, as in joint venture relationships between foreign and
local stockholders, so long as such agreements do not adversely affect third parties.

"In any event, it is believed that we are not here called upon to make a general rule
on this question. Rather, all that needs to be done is to give life and effect to the
 particular contractual rights and obligations which the parties have assumed for
themselves.

"On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats cannot be disregarded. On the other hand, the
rights of the stockholders to cumulative voting should also be protected.

"In our decision sought to be reconsidered, we opted to uphold the second over the
first. Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should
recognize and uphold the division of the stockholders into two groups, and at the
same time uphold the right of the stockholders within each group to cumulative
voting in the process of determining who the group's nominees would be. In
practical terms, as suggested by appellant Luciano E. Salazar himself, this means
that if the Filipino stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only. During this voting,
each Filipino stockholder can cumulate his votes. ASI, however, should not be
allowed to interfere in the voting within the Filipino group. Otherwise, ASI would
be able to designate more than the three directors it is allowed to designate under
the Agreement, and may even be able to get a majority of the board seats, a result
which is clearly contrary to the contractual intent of the parties.

"Such a ruling will give effect to both the allocation of the board seats and the
stockholders' right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors." (Rollo - 75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to Section 24 of the Corporation Code which
gives the stockholders of a corporation the right to cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily mean
a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section
2-a thereof which provides:

"And provided finally that the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in partially
nationalized activities shall be allowed in proportion to their allowable participation
or share in the capital of such entities. (amendments introduced by Presidential
Decree 715, section 1, promulgated May 28, 1975)"

The ASI Group's argument is correct within the context of Section 24 of the Corporation
Code. The point of query, however, is whether or not that provision is applicable to a joint
venture with clearly defined agreements:

"The legal concept of a joint venture is of common law origin. It has no precise
legal definition, but it has been generally understood to mean an organization
formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It
 is in fact hardly distinguishable from the partnership, since their elements are
similar - community of interest in the business, sharing of profits and losses, and a
mutual right of control. (Blackner v. MCDermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d,. 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d.
183, 288 P. 2d. 12 289 P. 2d. 242 [1955]. The main distinction cited by most
opinions in common law jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is formed for the
execution of a single transaction, and is thus of a temporary nature. (Tufts v.
Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71
NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]. This observation is not
entirely accurate in this jurisdiction, since under the Civil Code, a partnership may
be particular or universal, and a particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be governed
by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a
joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954])
(Campos and Lopez - Campos Comments, Notes and Selected Cases, Corporation
Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally
apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question
of whether or not the ASI Group may vote their additional equity lies in the agreement of the
parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as
regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right of
each group of stockholders to cumulative voting in the process of determining who the group's
nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by SEC,
Section 5 (a) of the Agreement relates to the manner of nominating the members of the board
of directors while Section 3 (a) (1) relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of
members of the board of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director
who would be beholden to them would obliterate their minority status as agreed upon by the
parties. As aptly stated by the appellate court:

"x x x ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may even be able to
get a majority of the board seats, a result which is clearly contrary to the
contractual intent of the parties.
 "Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors." (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the enterprise in
violation of the nationalization requirements enshrined in the Constitution and circumvention
of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the Anti-Dummy
Act allows the ASI group to elect board directors in proportion to their share in the capital of
the entity. It is to be noted, however, that the same law also limits the election of aliens as
members of the board of directors in proportion to their allowance participation of said entity.
In the instant case, the foreign Group (ASI) was limited to designate three directors. This is
the allowable participation of the ASI Group. Hence, in future dealings, this limitation of six to
three board seats should always be maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man board of directors there are provisions
already agreed upon and embodied in the parties' Agreement to protect the interests arising
from the minority status of the foreign investors.

With these findings, we affirm the decisions of the SEC Hearing Officer and SEC which were
impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin,
David P. Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R.
Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of
Saniwares at the March 8, 1983 annual stockholders’ meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to
a cumulative voting during the election of the board of directors of the enterprise as ruled by
the appellate court and submits that the six (6) directors allotted the Filipino stockholders
should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the
word "designate" meaning "nominate, delegate or appoint."

They also stress the possibility that the ASI Group might take control of the enterprise if the
Filipino stockholders are allowed to select their nominees separately and not as a common slot
determined by the majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board
directors should not be interpreted in isolation. This should be construed in relation to section
3 (a) (1) of the Agreement. As we stated earlier, section 3(a)(1) relates to the manner of
voting for these nominees which is cumulative voting while section 5(a) relates to the manner
of nominating the members of the board of directors. The petitioners in G. R. No. 75951
agreed to this procedure, hence, they cannot now impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative
voting procedure cannot, however, be ignored. The validity of the cumulative voting
procedure is dependent on the directors thus elected being genuine members of the Filipino
group, not voters whose interest is to increase the ASI share in the management of
Saniwares. The joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative voting may not be
used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish
openly. There are substantial safeguards in the Agreement which are intended to preserve the
majority status of the Filipino investors as well as to maintain the minority status of the foreign
investors group as earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED
and the petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court
of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach, John Griffin, David
Whittingham, Ernesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo,
Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of
Saniwares at the March 8, 1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in G. R. Nos. 75975-76 and
G.R. No. 75875.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin, and Cortes, JJ., concur.

Feliciano, J., no part. One of parties represented by his former firm.

Source: Supreme Court E-Library | Date created: October 27, 2014

This page was dynamically generated by the E-Library Content Management System

Supreme Court E-Library